Pricey Diversification

By Robert Milburn

After a near meltdown during the financial crisis and a staggering slew of scandals – from a $780 million fine for assisting tax evasion to a $1.5 billion hit for pleading guilty to criminal fraud around the manipulation of LIBOR – it might be easy to write off UBS (ticker: UBS) and its wealth management division as an unmanageable beast living on borrowed time in its current incarnation.

There is no sign of it. According to Craig Walling and Ricardo Gonzalez, who co-head UBS’s Wealth Management Americas International operations, their assets under management have grown 20% since 2010, to $52 billion.

Driving this growth, the executives said, are a host of new services and products. At the top of UBS’s wealth management business in the Americas are the $100 million-plus families who could be living anywhere in the world, but want a good wedge of their assets parked and managed in the U.S. For these “global citizens”, identifying “home” is increasingly difficult; they cite, as an example, a wealthy client who is Brazilian-born, U.S.-educated, and owns a second home in the U.K.

The new service game for these $100 million-plus clients is to kick diversification up to a whole new level, advice UBS delivers via its Global Family Office support unit. For the last 30 years, said Walling, diversification was primarily meant to mean diversification of asset classes, the typical 70/30 split between equities and fixed income. Now, he said, “What we’re seeing is diversification, not just across asset classes, but across markets, currencies, and jurisdictions.”

A Swiss conglomerate might issue a dollar-denominated bond, the proceeds of which it invests in emerging markets. Wealthy families need to become similarly sophisticated at parsing their risk via jurisdictions, currencies and markets. A multi-billion dollar transaction that the UBS wealth management team facilitated this year, says Gonzalez, involved a client whose family office assets were ultimately spread over five different jurisdictions, reflecting the client’s familial, residential and business interests across the globe.

Consider alone the benefits of currency diversification for UBS’s typical customer. Latin American clients account for 70% of the UBS unit’s assets in the Americas, and face significant loss of wealth, due to inflationary pressures, if their funds are kept in their home currency. So it’s logical for such clients to convert assets as quickly as possible to dollar-denominated investments.

But what the financial crisis made clear is that even safe-havens like the U.S. are susceptible to meltdown, so the risk-reducing logic is now to put in place a more comprehensive and sophisticated multi-currency hedge over more jurisdictions and markets. It’s a strategy even domestic U.S. clients are buying into.“I’m old enough to say, that 30 years ago when I talked to ultra-high net worth [U.S.] clients, one out of ten asked questions about investing internationally,” Walling said. “Today it’s probably closer to 7 out of 10.”

Having established this exotic-diversification service at the highest levels of private banking, UBS is now rolling the service out in a platform product targeted at families with investable assets in the $5 million to $30 million range.

The UBS Global Investment Portfolio requires a $ 2 million minimum investment, and is for clients who want to delegate portfolio management to UBS. The product specifically offers “multi-manager, multi-market and multi-currency” services, say the executives, jargon that essentially means a client can store assets at UBS, giving him prime broker access, while also investing in 17 different currencies and purchasing stocks and bonds in 34 different countries. Portfolio management is via UBS and the in-house execution of third-party manager investment ideas, coming from the likes of Lazard or Threadneedle.

The big selling point: The Global Investment Portfolio charges a single-management fee of 1.75% annually, no matter how many jurisdictions, markets and currencies involved, but it doesn’t include trading costs, when purchasing the underlying products like mutual funds and ETFs.

Doug Black, a former UBS Private Wealth Management Chief Operating Officer, runs SpringReef Partners, a firm that helps families ask the rude questions of their wealth managers, helping them navigate the conflicts of interests and complex fee negotiation process. We asked Black to review the product literature we were handed by UBS.

Black was, like us, impressed by how UBS managed to merge such a complicated weave of products and services into one uniform, single-fee account, all of which are typically separate fee-based programs. But at 1.75% in annual fees, Black says, UBS is overcharging. At the product’s minimum account of $2 million, the fee is 50 to 75 bps above market norms, he says; at $20 million, it’s 125-130 bps more expensive. Remember, too, clients have to add into the costs an additional 75 bps or so in fees, charged by the underlying mutual funds and ETFs.

UBS explained that, well, the 1.75% annual fee is negotiable and UBS’s financial advisors have “the ability to discount this [fee] at their discretion.” Black then exclaimed, “Does that mean if I’m a client with $10 million in assets, if I turn right, I get a discount, and if I turn left, I don’t?”

We asked UBS to provide Penta with a transparent sliding scale that lays out the decline in product fees as clients’ assets increase, but the bank only responded with the remark, its “fee [as negotiated by UBS advisors] is well in line with the market.” Our conclusion: For all the veneer of pricing transparency through this 1.75% one-off fee, the true cost of the product is really up to how good a deal the UBS clients can negotiate for themselves.

So UBS gets high marks for product innovation, but it looks to us like the bank still doesn’t understand the concept of pricing transparency – the very issue that has enraged its clients in the past.

About Penta

Written with Barron’s wit and often contrarian perspective, Penta provides the affluent with advice on how to navigate the world of wealth management, how to make savvy acquisitions ranging from vintage watches to second homes, and how to smartly manage family dynamics.

Richard C. Morais, Penta’s editor, was Forbes magazine’s longest serving foreign correspondent, has won multiple Business Journalist Of The Year Awards, and is the author of two novels: The Hundred-Foot Journey and Buddhaland, Brooklyn. Robert Milburn is Penta’s reporter, both online and for the quarterly magazine. He reviews everything from family office regulations to obscure jazz recordings.